China pork producers surge as swine disease cuts supply

Shares in China's leading pig producers have soared to record levels despite one of the worst disease outbreaks in years, as investors bet on tightening pork supplies and strong government support for leading producers.

China is battling the world's fastest spreading outbreak of African swine fever, an incurable pig disease that has been confirmed in 28 of its provinces and regions.

Reuters reports that livestock shares initially slid on the early outbreaks in August and September. But they have climbed since November, even as outbreaks continued and as transport curbs on infected provinces hit prices and hurt profits at most producers.

While listed companies still account for only a modest proportion of China's annual production of 700 million pigs, they are growing quickly as Beijing promotes modern farm techniques. Muyuan produced 11 million pigs last year.

The share price gains come even as most companies have forecast a plunge in earnings for last year. In a preliminary report, Muyuan said its 2018 net profit slid 78 percent to 520.2 million yuan ($77.7 million), after prices fell partly because of African swine fever.

But analysts say prices for live pigs have bottomed and could rise from 12 yuan per kilogram currently to as much as 20 yuan in the second half, as supplies plunge and farmers face challenges in restocking farms.

"Prices could rise quite high, quite quickly," said Xiong Kuan, analyst at Cofco Futures, who expects a 20 percent drop in supplies. Others say it could be as much as 30 percent.

Large players with low-cost modern farms that are better able to resist disease are expected to reap good profits.

They will also win support from the government, already worried about supply. China eats half the world's pork, by far the country's most popular meat, but much of the production comes from millions of small farmers whose farms have been most at risk of disease.

"The government sees very clearly, among all the cases of African swine fever, less than 20 percent took place on big farms. They are encouraging big farms with good biosecurity measures to expand production," said Feng Yonghui, chief analyst at Soozhu.com.

Last month the agriculture ministry urged farmers to quickly replenish their herds as concerns grew that prices will rise rapidly in the second half of the year.

And last week, Beijing issued a draft plan aimed at tackling the disease and shoring up supplies. It called for the promotion of high-quality farming companies in southern areas that need to increase supplies and support for large-scale integrated processors across the country.

Many big companies have continued to expand, eyeing future bumper profits. Top 10 producer New Hope Liuhe produced 2.5 million pigs in 2018, up 50 percent on the prior year.

Muyuan raised 5 billion yuan in a share placement in December to add new farms for 4.8 million pigs.

The expansion would help provide the market with stable supplies and allow the company to "firmly grasp the opportunities from market transformation," it said.